Impact of raising hotel tax
By Robbie Dingeman
Advertiser Staff Writer
Tour wholesalers, lodging companies and other firms specializing in Hawai'i travel say they will absorb hundreds of thousands of dollars in losses over the next few months rather than retroactively charge guests for an increase in the hotel-room tax that went into effect July 1.
They say part of the problem is that the 1 percentage point increase to 7.25 percent took effect just weeks after lawmakers agreed to it, leaving little time to notify customers who had already booked their vacations.
Industry leaders said it makes for bad customer relations to tack the tax on after a lower price was quoted earlier, even if the percentage increase is relatively small. But for companies that deal in thousands of visitors, the small amount adds up quickly during an economic downturn.
Wholesaler Jack Richards estimates Pleasant Holidays will absorb hundreds of thousands of dollars worth of tax costs this year.
"It's all about being competitive with the other destinations," Richards said. For one of his company's larger bookings, the increase in taxes added up to $2,800, too much for that customer to swallow.
"He wasn't going to pay and we ended up eating it," Richards said.
Richards, president and chief executive officer of California-based Pleasant Holidays LLC, said his company sends hundreds of thousands of travelers to Hawai'i each year.
"Putting it in July hits the market at the peak of travel season," Richards said. "This is millions of dollars to the travel industry at the absolute worst time it could hit."
Officials in Hawai'i's No. 1 private industry had vehemently — but unsuccessfully — opposed any increase in the room tax after more than a year of plummeting visitor arrivals and declining hotel occupancy. In the end, lawmakers successfully pushed through legislation that raises the hotel-room tax — formally known as the transient accommodations tax — to 7.25 percent this year and 8.25 percent next July.
Casualties of the tourism downturn are evident. Marc Resorts Hawaii, a hotel management company, closed. The Ilikai Hotel closed Thursday night but negotiations are under way to reopen soon. Other companies have laid off workers or cut hours to stay afloat.
The head of Hawai'i-based Outrigger Enterprises Group, David Carey, said lawmakers described the increase as only 2 percentage points over the two years but that's actually a 28 percent increase in the size of the tax.
And looking at recent declines in revenues, Carey isn't sure that the increase will achieve the stated goal of bringing in more money if it serves to dampen the faltering industry.
Like Richards, Carey estimates that wholesalers and operators are eating hundreds of thousands because of the sudden tax increase.
And he expects more fallout in the months ahead. As expenses grow and revenue shrinks, "marginal operations will start to close."
Carey said his company's hotels and resorts have been absorbing this month's increase while customers and computers catch up with the hike.
He believes even small increases in this competitive environment can send computer-savvy, price-sensitive travelers to a different vacation destination.
"It's not a good public relations thing when we're scraping for every piece of business," Carey said. "We're still scratching and clawing for every ounce of business."
Murray Towill, president of the Hawai'i Hotel and Lodging Association, said the industry has worked to fight the drop in the number of visitors and guests by discounting prices.
And clinging to business gets tougher with any added cost, Towill said. "It just becomes that much harder for people to keep their head above water given the added impact of a tax increase at a time when rates are being reduced."
In the long term, he said, "that has impact on ability to pay employees and just generate the income needed to keep the company or business operating."
And any increase hits the lucrative Japanese market hard, said Akio Hoshino, senior vice president of Jalpak International Hawaii Inc., which sells travel packages.
Hoshino estimates the tax will cost his company at least $400,000 this year. "We pay it for them; we cannot charge them because we had already informed them much in advance," he said. "It's a small amount but it becomes a huge amount for package wholesalers."
Hoshino said charging each guest would take a lot of work. He described the situation as "very, very unfortunate."
He added, "It seems Hawai'i state government is not concerned about these big losses we had to have."
Long-term, Hoshino said he thinks the increases will force higher prices that discourage some travelers. "We have to increase the tour price. Now the Japanese market is very weak so any price increase will affect the demand for Hawai'i."
State Sen. Clarence Nishihara heads the Senate Tourism Committee. He said lawmakers felt they were left with little choice because of the need to pay for critical state services during an economic decline.
Nishihara said lawmakers felt the increase was small enough that it wouldn't be a long-term problem and rejected proposals for even higher taxes.
"We are cognizant that we don't want to kill the golden goose," he said. "We have to look for income some place and there's very few places you can look."
"There's no question that the state is in real dire financial straits," he said. "Nobody's looking to raise more taxes, certainly not during a downturn."
He said he never heard discussion of delaying the tax to September or January to allow preparation time but would have been open to that move.
TAX RANKS LOW
Nishihara notes that Hawai'i's hotel-room tax rates are not among the highest in the nation by percentage. A 2008 study of room taxes and the economic impact commissioned by the American Hotel & Lodging Educational Foundation shows the room taxes rank in the lower third in the nation, below Little Rock, Ark., and many other cities and states.
But because of higher average room rates, the Hawai'i tax rises to the top 10 in the nation when based on dollar amount added to a bill at checkout.
Wholesaler Richards noted that online travel business Expedia and other companies recently took off booking fees when they saw how price-sensitive travelers are. "People were changing flights over a $10 surcharge fee," he said.
While the companies will adjust and begin to pass on the cost to customers, Richards said the Expedia example shows that even small price increases can make a traveler change plans.
"Over time, it will drive down demand," Richards said. "History will judge whether this was the right move." State tourism liaison Marsha Wienert said she worries that it will be difficult for the industry to gradually raise rates to get back on a profitable footing.
"We can't thrive in the price wars we're in," she said.
Leon Yoshida is president of Sawayaka Hawaii Inc., an online travel company that brings about 30,000 Japanese visitors to Hawai'i each year. He also serves on the board of the Hawai'i Tourism Authority.
Yoshida said the industry feels the squeeze from any additional cost during this economic downturn.
"The timing is bad to increase the tax right now because we're hurting so badly," he said. "The ones that are already booked, we had to eat it."
Yoshida said wholesalers who rely on printed brochures are hurting more than his online company. "What's printed, you're going to have to live with it."